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We study private funds available to retail investors of modest wealth. Our sample covers unlisted real estate investment trusts (REITs) for superior cash flow and fee data. Fee structures are skewed toward performance-insensitive components of the compensation contract, particularly front-end loads. The average unlisted REIT underperforms the listed benchmark by 6.5% per year, 5% of which is attributable to fees. Unlisted REITs underperform institutional-grade private equity real estate funds. Fees paid to investment advisors also explain fundraising success, while past performance does not. The underperformance is consistent with the consequences of managerial conflicts of interest, inadequate governance mechanisms, opaque disclosure, and poor investment advice. [ABSTRACT FROM AUTHOR]

Sustainable investing refers to a range of practices in which investors work toward financial goals while incorporating environmental, social, and governance (ESG) considerations into the investment process. There is growing suspicion that many firms and investment companies may have only a nominal commitment to sustainability. We investigate mutual funds and exchange-traded fund (ETFs) that report a sustainability mandate in their prospectus, as identified by Morningstar, and find that 85% of these mutual funds and 60% of these ETFs possess a Morningstar Sustainability rating in the top one-third of all funds. Morningstar ratings indicate that while mandated mutual funds have done well in the past, their short-term financial outlook, according to analysts, is below their non-mandated peers. Additionally, mandated mutual funds tend to invest in stocks with better longer-term economic moats and typically have lower expense ratios, but are more likely to carry a load charge. Mandated ETFs offer investors lower expenses than mandated mutual funds but do not have as strong of a commitment to sustainability. Although Morningstar's Analyst ratings predict similar performance, mandated ETFs with Quantitative ratings are projected to outperform not only their non-mandated peers but also mandated mutual funds. Overall, mandated funds appear to be walking the sustainability walk and not charging more for doing so, allowing investors to include ESG considerations in the selection process without being financially impaired. [ABSTRACT FROM AUTHOR]

This article explores the factors that drive risk and active risk in asset manager model portfolios. The study reveals that model portfolios with different allocations to index and active funds have similar levels of total and active risk. It also finds that a significant portion of the active risk in model portfolios is due to style factors, although the average model has limited exposure to commonly rewarded style factors. The article suggests that there is room for improvement in model performance by adjusting factor exposures. The data used in the analysis comes from Morningstar and BlackRock's Aladdin Risk system. The article discusses the impact of asset allocation on active risk calculations, including the potential for double counting certain exposures in fixed income indexes. It also notes that the Aladdin Risk Model used in the study does not capture the impact of asset class timing. The results show that there is little variation in total risk between models using active funds and index funds. The article further examines active risk relative to peer and custom benchmarks, as well as asset class risk decompositions. It concludes that style factors contribute the most to risk. This document focuses on the factor and risk exposures of model portfolios, which are increasingly popular among individual investors. The analysis primarily looks at equity and fixed income exposures and finds that most model portfolios have minimal exposure to rewarded style factors such as size, value, momentum, profitability, and volatility. The study suggests that model builders could potentially enhance returns by adjusting the magnitude of their style factor exposures. Additionally, the document highlights the potential for future research on performance [Extracted from the article]

Marketing and distribution expenses are responsible for about one-third of the cost of active management in the mutual fund industry. Estimating a structural model with costly investor search and learning about fund skill, we find that marketing is nearly as important as performance and fees in determining fund size. Eliminating marketing substantially improves welfare: capital shifts toward cheaper funds and competition decreases fees; active funds shrink and capital allocation becomes more closely aligned with skill. Declining investor search costs imply a reduction in marketing expenses and management fees as well as a shift toward passive investing, as observed empirically. [ABSTRACT FROM AUTHOR]

This article analyzes the influence of industry competition and investor sentiment on the likelihood of change in investment fund management fees in Brazil. Due to the wide variety of existing funds, with various characteristics and objectives, there may be significant differences in the fees observed. Thus, it is worth analyzing the factors that influence the amount of fund management fees charged, since the literature highlights that the payment of fees is related to fund performance. Also, it is observed that the Brazilian fund industry, despite having a large number of available funds, is still concentrated in few management firms, which is an indication that there is a low competition level. In practical terms, this investigation may be useful to investors in the fund selection process, since the management fee represents one of the main costs an investor faces when investing in this industry. The results point out the importance of adopting greater transparency in the disclosure of fees by financial institutions, since there are indications that the amounts charged are influenced by the characteristics of funds and investors. The methodology adopted involves Logit/Probit regression models, which had changes in the management fee as an explained variable and, as explanatory variables, the proxies of competition and investor sentiment, in addition to other control variables. It was observed that the investor sentiment proxy was significant in explaining the probability of change in management fees, mainly for setting higher fees. However, no statistical significance was observed for industry competition. This research innovates by analyzing the role of industry competition and investor sentiment on the probability of changing management fees, thus contributing to fill a gap found in the Brazilian national literature. [ABSTRACT FROM AUTHOR]

• German brokerage introduces a flat-fee alongside a commission-based scheme. • Comparison of switchers to the flat-fee to matched commission-based clients. • Adopters seek and follow (unchanged) financial advice more. • Adopters increase portfolio values and trade more. • Adopters improve portfolio efficiency through higher fund shares. Using a field study at a German brokerage, we investigate advised individual investors' behavior and outcomes after self-selecting into a flat-fee scheme (percentage of portfolio value) for mutual funds. In a difference-in-differences setting, we compare 699 switchers to propensity-score-matched advisory clients who remained in the commission-based scheme. Switchers increase their portfolio values, improve portfolio diversification, and increase their portfolio performance. They also demand more financial advice and follow more advisor recommendations. We argue that switchers attribute a higher quality to the unchanged advisory services. [ABSTRACT FROM AUTHOR]

We test for the presence of a tail risk premium in the cross-section of mutual fund returns and find that the top tail risk quintile of funds outperforms the bottom by 4.4% per annum. This premium is not simply a reward for market risk, nor do commonly used risk factors offer an adequate explanation. Our findings hold across double-sorted portfolios formed on tail risk and a number of fund characteristics. We also find that funds susceptible to tail risk tend to be small, young, have high management fees, and have managers who do not risk their own capital. [ABSTRACT FROM AUTHOR]

Our experiments evaluate the role of information presentation in reducing violations of the Law of One Price in individual investor selection of index mutual funds. The results indicate that most individuals fail to minimize fees. However, individuals allocate nearly 27% (43%) more of their investment dollars to the lowest fee index mutual fund when receiving fee information in the form of a table compared to a graph presentation (in ten-year rather than one-year form). Overall, a simple change from table to graph fee presentation results in a statistically and economically significant reduction in the fees paid by investors. [ABSTRACT FROM AUTHOR]

This paper examines whether there is information sharing between mutual funds and their auditors about the auditors' other listed firm clients. Using data from the Chinese market, we find that mutual funds earn higher profits from trading in firms that share the same auditors. The effects are more pronounced when firms have a more opaque information environment and when the audit partners for the fund and the partners for the listed firm share school ties. The evidence is consistent with information flowing from auditors to mutual funds, providing mutual funds with an information advantage in firms that share the same auditors. Our findings are robust to the use of audit‐firm mergers and acquisitions (M&As) as exogenous shocks and several other robustness checks. We further find that auditors benefit by charging higher audit fees for mutual fund clients and by improving their audit quality for listed firm clients. Our study provides evidence of bi‐directional information sharing between two important market intermediaries. [ABSTRACT FROM AUTHOR]

Research background: Exponential growth of passive mutual funds after 2007-2008 global financial crisis put pressure on active fund managers to lower the management fees. The real costs of active fund management are, however, very often higher than the values of management fees reported publicly. Thus it is not easy to decide on the quality of the fund management and estimate the level of management charges optimal for the future fund performance. Purpose of the article: In this study, we propose to utilize an actual rate of the management fee (ARMF) disclosed in the management company financial statements as a measure of the real value of the management costs and investigate its determinants in mutual funds of different styles. Methods: Using a dataset of 21,618 monthly observations for 500 mutual funds from a market of diversified structure and high management fees charged we test the operating model of a mutual fund performance, and derive the formula of a before-fee return with the ARMF as its component. The fund performance is measured by a raw before-fee return and two types of risk-adjusted alphas based on the multifactor model of Carhart (1997) and the fund attributes. Later, using panel data we explain ARMF by mutual fund performance and attributes. We also compare the results to the ones obtained for the total operational cost (TOC) -- a value similar to ARMF that is disclosed in mutual fund financial reports. Findings & value added: We find that the proposed ARMF is related more to the size and not to the performance, age or a cash flow of mutual funds. We observe it among all studied fund styles. The largest deviations of the average ARMF are seen in the management companies that belong to the banks' capital groups. The proposed measure of the management fee included in the operating model of a mutual fund performance can be used for any local mutual fund worldwide, and compared with other fund markets of more or less diversified style structures. [ABSTRACT FROM AUTHOR]

Purpose: In the European Union, the Undertakings for Collective Investment in Transferable Securities Directive (UCITS IV) requires fund management companies to provide a Key Investor Information Document (UCITS KIID) for investors. This papers uses archival data from the Finnish mutual fund market to test how the regulation's information disclosure requirements concerning past performance, risk and fund fees are associated with mutual fund flows. Design/methodology/approach: The study uses archival data on the mutual funds market in Finland to test how the regulation relating to retail investors' information requirements is associated with mutual fund flows. Findings: Our findings suggest that the UCITS KIID predicts retail investors' fund flows. While past performance is associated with fund flows throughout the observation period, retail investors appear to have become more sensitive to fund fees and invest in less risky funds following the adoption of the UCITS IV period. Practical implications: Information relating to fund fees and risk appears to be relevant to retail investors, which should be acknowledged in future iterations of short-form disclosure and in mutual fund marketing. Originality/value: This paper is the first to assess the significance of KIID in actual market environment. [ABSTRACT FROM AUTHOR]

We compare two bootstrap methods for assessing mutual fund performance. The first produces narrow confidence intervals due to pooling over time, whereas the second produces wider confidence intervals because it preserves the cross correlation of fund returns. We then show that the average U.K. equity mutual fund manager is unable to deliver outperformance net of fees under either bootstrap. Gross of fees, 95% of fund managers on the basis of the first bootstrap and all fund managers on the basis of the second bootstrap fail to outperform the luck distribution of gross returns. [ABSTRACT FROM PUBLISHER]

Theory predicts that capping brokers’ compensation exacerbates the exploitation of retail investors. We show that regulated caps on mutual fund 12b-1 fees, effectively sales commissions, are associated with negative equity fund performance, but only after a structural shift toward maximum permitted levels of the fees around 2000. Past this break point, flow–performance sensitivity shifts from the middle- to the highest-performing funds, suggesting that the fee cap increases performance-chasing behavior by constraining brokers’ incentives to learn about lower-ranked funds. The policy implication is that regulators must reevaluate the efficacy of caps on brokerage fees. [ABSTRACT FROM PUBLISHER]

We examine the dynamics of assets under management (AUM) and management fees at the portfolio manager level in the closed-end fund industry. We find that managers capitalize on good past performance and favorable investor perceptions about future performance, as reflected in fund premiums, through AUM expansions and fee increases. However, the penalties for poor performance or unfavorable investor perceptions are either insignificant, or substantially mitigated by manager tenure. Long tenure is generally associated with poor performance and high discounts. Our findings suggest substantial managerial power in capturing CEF rents.We also document significant diseconomies of scale at the manager level. [ABSTRACT FROM AUTHOR]

• Investors consider ESG criteria in their investment decisions. • However, ESG criteria weigh much less than financial return or fees. • The relatively low weight of the ESG criteria has remained fairly stable. • Our models predict fund flows with an accuracy of about 70% • Funds' past ESG performance guarantees future ESG performance. Despite the growth in the supply of socially responsible investment products, the weight of environmental, social and governance (ESG) factors in the decisions of mutual fund investors remains under-researched. We conducted a study relating fund flows to past returns, ESG performance and other financial variables using data from 3,767 US mutual funds from 2015 to 2021. First, we aimed to assess the importance of ESG performance in investment decisions. Next, we studied whether ESG performance is increasingly important or has reached its limit. Finally, we developed decisional models to predict the flows raised by each investment fund, its financial return and ESG performance. We used logistic regression, neural networks, random forest and gradient boosting decision trees. We found that the investors consider ESG performance, but the factors that matter most are past growth, mutual fund fees and past returns. Our models predicted the money raised by the funds, obtaining accuracy rates of around 70%. In addition to confirming that "past financial return does not guarantee future financial return," we found that "past ESG performance guarantees future ESG performance," which may be of interest to socially responsible investors. [ABSTRACT FROM AUTHOR]

Previous work shows large differences in fees for S&P 500 index funds and other funds and suggests that investors suffer wealth losses investing in high-fee funds when similar low-fee funds are available. In contrast, the neoclassical model of mutual funds (Berk and van Binsbergen, 2015 , J. Financ. Econ. 118, 1–20) argues that percentage fees are irrelevant, as fund size will adjust in equilibrium such that net alphas are equal to zero. We show that fees matter from an investor perspective. We document (i) a strong negative association between net-of-fee fund performance and fees in a sample of all US and international equity funds, (ii) economically large, robust, persistent, and pervasive fee dispersion in the mutual fund industry, and (iii) important economic effects for investors. During the sample period, the mutual fund industry has generated a total value lost (i.e. a negative net value added) of 125 billion USD, coming predominantly from high-fee funds. [ABSTRACT FROM AUTHOR]

Considering the institutional factors of the German mutual fund market, we analyze equity fund holdings of German retail clients who received financial advice between 2005 and 2014 to investigate whether those investors overweight the bank-affiliated asset manager and if so, whether this bank-affiliated asset manager bias leads to higher fees, i. e. Total Expense Ratios. Our analysis clearly indicates the presence of large bank-affiliated asset management biases for clients of all different banking sectors. Thus, German retail clients follow the biased financial advice they receive from their bank. Surprisingly, this bank-affiliated asset manager bias significantly reduces portfolio costs measured via mutual fund fees. Therefore, German banks disproportionately promote products of bank-affiliated asset managers but this biased advice does not lead to higher portfolio costs. [ABSTRACT FROM AUTHOR]

The active money management industry is characterized by both strong competitive pressure from passive investment vehicles and high fees. This paper investigates how the introduction of low-cost index funds affects fund company strategies. The retail mutual fund market is segmented, where unsophisticated investors rely on financial advisers and sophisticated ones invest directly. Exploiting the staggered entry of low-cost Vanguard index funds as competitive shocks, I show that, in response to competition, incumbents sold to self-directed investors reduce their fees by 5% of the mean; however, funds sold with broker recommendations increase their fees by 6% of the mean. Index fund entry also slows the growth of actively managed funds. The responsiveness of broker-sold fund flows to distribution fees increases, suggesting a shift in composition toward less elastic consumers. Further, incumbents increase the degree of active management. The results illustrate why mutual fund fees slowly decline in the aggregate despite competition from lower-cost alternatives. This paper was accepted by Gustavo Manso, finance. [ABSTRACT FROM AUTHOR]

Purpose: The purpose of this study is to update the investment literature by providing latest evidence of performance of Islamic mutual funds by using global sample mutual funds data to support with empirical facts. Design/methodology/approach: This study analyzes the comparative performance of Islamic and conventional mutual funds by using capital asset pricing model, Fama & French's three-factor model and Carhart's four-factor model. Further, the study tested the coskenwness effect by using data envelopment analysis approach. Findings: The authors find evidence that when size of the funds is controlled, Islamic investment underperform the conventional mutual funds in four out of six models. The size of underperformance varies from model to model: from 32 basis points in the Carhart's four-factor model with the skewness factor to two basis points at the Fama and French's three-factor model. Also the study finds that alpha(s) are only insignificant for conventional mutual funds when the skewness factor is included in the regression. While comparing the loading on Islamic mutual funds, results show that Islamic mutual funds are less risky than conventional mutual funds when they are controlled for skewness. Originality/value: This study uses the different factor models of performance evolution which help in overcoming weakness of measuring the Islamic mutual funds' performance. [ABSTRACT FROM AUTHOR]

Franklin Templeton started its Indian operations in the year 1996. On 24th April 2020 it made an announcement that it would be winding up Franklin India Credit Risk Fund and five other funds. This case is about the debacle of Franklin India Credit Risk Fund. Liquidity crisis in the debt market due to various events that happened in 2019, exposure towards debt instruments that turned risky (such as Yes Bank and Vodafone), reduction of inflows, redemption pressure, debt market becoming illiquid due to COVID-19 pandemic, were cited as some of the reasons for winding up of Franklin India Credit Risk Fund. The important thing to note is that when other credit risk funds have not taken the decision of winding up, why Franklin India Credit Risk Fund took this call? This case presents an opportunity to the students to analyse the factors that have contributed to the debacle and whether the decision taken is correct? [ABSTRACT FROM AUTHOR]

Advisors often manage multiple versions of a fund. These “twins” have the same manager and similar performance but are sold to different investors with differing abilities to select and monitor managers. Comparing investor flows in retail and institutional twins, we find that institutional investors are more sensitive to high fees and poor risk-adjusted performance. Consistent with the reduction of agency problems from greater monitoring, retail funds with an institutional twin outperform other retail funds by 1.5% per year. After the institutional twin is created, expenses decrease while measures of managerial effort at the retail fund increase. [ABSTRACT FROM PUBLISHER]

Since 2011, Morningstar has issued Morningstar Analyst Ratings on many of the largest mutual funds in the United States. In June 2017, Morningstar launched the Morningstar Quantitative Rating™ to provide a forward‐looking rating on all mutual funds. Morningstar uses a "robo‐rater" machine‐learning model to assign Morningstar Quantitative Ratings. However, the "robo‐rater" cannot utilize the complete set of information available to Morningstar's analyst as it cannot process "soft information." The purpose of this study is to evaluate if and how this "robo‐rater" is conducive to mutual fund selection. I find no evidence that the "robo‐rater" offers value to investors beyond its assessment of mutual fund expenses and I find that its inability to process "soft information" makes the Morningstar Quantitative Rating™ much less useful than the Morningstar Analyst Rating™. I also examine the relationship between Morningstar Quantitative Rating™ and mutual fund flows and find that the "robo‐rater" has little to no influence on investors' choice of mutual funds. [ABSTRACT FROM AUTHOR]

The present paper reports the performance evaluation of selected mutual fund schemes using three performance evaluation models. The models have been applied to see whether there is any relationship among the performance evaluation models. The aim was also to study there is any significant difference between the public sector and private sector select mutual fund schemes. The results found that there is a significant relationship among the performance evaluation methods. In addition the study also found that there was no significant difference between the performances of two sector schemes. Further, the paper also discussed the applied aspects of this investigation. [ABSTRACT FROM AUTHOR]

This paper examines the ability of mutual fund managers to time aggregate investor sentiment. Our results indicate that mutual fund managers alter their fund's market exposure relative to changes in investor sentiment. The out-of-sample analysis suggests top sentiment timers, which hedge against abnormally high market sentiment, generate higher returns than bottom sentiment timers by approximately 3% per year. These results persist even to the exclusion of crisis periods. Moreover, our results suggest that sentiment timing ability, especially the ability to hedge against sentiment, is more likely to be associated with funds that are older and larger, while the tendency to chase sentiment is highly driven by the level of fees received by the mutual fund manager. Our results are robust after controlling for alternative sentiment measures, various timing abilities and several risks. [ABSTRACT FROM AUTHOR]

This study examines the impact of the emergence of exchange-traded funds (ETFs) as an alternative investment vehicle to mutual funds. As the number of ETFs continues to rise, we investigate potential risks and disadvantages posed by ETFs in comparison to traditional mutual funds. We compare the returns, performance, and expense ratios of ETFs to those of mutual funds. We find that expense ratios are positively correlated with actively managed mutual fund returns and that passive funds have outperformed active funds since their inception. There is downward pressure on mutual fund fees over time, suggesting increased competition between mutual funds and ETFs. We also find, up to a certain threshold, actively managed funds are worth their costs. [ABSTRACT FROM AUTHOR]

The article discusses the relation of U.S. Judge Richard A. Posner to a case about the fiduciary duty of an investment adviser in relation to actively managed mutual funds. Topics include an opinion by Judge Frank Easterbrook, the U.S. Supreme Court ruling in the case Jones v Harris Associates, and the significance of the previous case Gartenberg v Merrill Lynch Asset Management, Inc.

Modern finance theory and investment practice have shifted toward "passive investing." The current consensus is that most savers should invest in mutual funds or ETFs that are (i) well-diversified, (ii) low-cost, and (iii) expose their portfolios to age-appropriate stock market risk. The law governing trustees, investment advisers, broker--dealers, 401(k) plan managers, and other investment fiduciaries has evolved to push them gently toward this consensus. But these laws still provide broad scope for fiduciaries to recommend that clients invest instead in specific assets that they believe will produce "alpha" by outperforming the market. Seeking alpha comes at a cost, however, in giving up some of the benefits of the well-diversified, low-cost, appropriate-risk baseline. Too little attention has been given in fiduciary law to this tradeoff and, thus, to when seeking alpha is prudent and beneficial for savers, and when it is not. This Article begins to fill that gap by making two contributions. First, we provide the first benchmark estimates of how much alpha is required before ordinary investors would be better off departing from the consensus. For example, we estimate that a person of average risk aversion would annually need to beat the market by (i.e., obtain alpha of) between 6% and 15% before being willing to entirely forego the benefits of diversification and hold an individual stock (and that during a financial crisis such a person would need an annual alpha between 9% and 18%). Second, we consider the implications of our results for the various branches of law governing investment fiduciaries. We propose generally that fiduciaries should prudently weigh these alpha tradeoffs, and then should explain them to their clients before recommending (or executing) investments that deviate from the low-cost, well-diversified, age-appropriate exposure standard. We argue that through new technology, this kind of information can be given to retirement savers and others at quite low cost. Our results also have a variety of more specific applications. For example, our work shows that the value of diversification increases during periods of market upheaval, and therefore the duty of trustees to diversify personal trusts and employee retirement plans should likewise strengthen during such periods. [ABSTRACT FROM AUTHOR]